Shift4 Payments: The Next Big Player in the Payment Industry

What is driving the company's rapid growth?

Shift4 Payments was founded in 1999 and went public in 2020. Since its IPO, the company has achieved an impressive revenue CAGR of over 49%, driven by both organic growth and strategic acquisitions. But what fuels this rapid expansion? What is Shift4’s business model, and where does its competitive edge lie? Let’s explore the key factors behind the company’s remarkable success.

As always, we will also assess the risks and opportunities facing the company, alongside a detailed analysis of key metrics, fair price estimates, and the potential TSR shareholders can expect based on current assumptions.

Company overview

The company's initial success was built on its cloud-based POS (Point of Sale) software for restaurants. Over time, by continuously adding value to its offerings, Shift4 transitioned to generating the majority of its revenue from payment processing fees.

Today, payment-based fees are the company’s primary revenue driver, though they still maintain a stream of subscription revenue from their software services.

Revenue breakdown per quarter in $M

As we can see, the subscription component remains relatively small (8.5% of sales in Q2 2024), but it plays a crucial role in Shift4 Payments' success. The company doesn’t just offer payment processing; it provides a comprehensive suite of software solutions that help businesses organize, execute, manage, and leverage data, delivering significant value to its customers.

This creates two key dynamics to understand:

1. Increased value and stickiness. By offering high-value software alongside payment solutions, Shift4 can charge higher fees while fostering stronger customer loyalty, making its service 'stickier' compared to competitors.

2. Industry-specific focus. Shift4 operates by verticals (industries), tailoring its software to meet the unique needs of each sector. The software serves as an entry point for the payment solution, it must be strong enough to justify the higher fees compared to competitors.

The main verticals

As discussed, Shift4 Payments leverages various verticals to deliver value to its customers. Let’s explore the key ones:

Restaurant

This was Shift4's original segment, and it continues to experience rapid growth. Restaurants benefit greatly from using Shift4’s software due to its wide array of features: it's 100% cloud-based, easy to implement, enhances revenue per customer, and utilizes data for operational insights.

The following infographic highlights the various features offered by the POS (Point of Sale) system - named SkyTab.

Hospitality

In the hospitality vertical, Shift4 Payments provides integrated payment solutions for hotels, resorts, and casinos. Their platform streamlines operations by offering a unified solution that includes POS systems, property management systems (PMS), and payment processing.

Shift4's technology helps hospitality businesses manage guest experiences more efficiently, from check-in to dining, and supports mobile payments, contactless transactions, and back-office functions.

Sports and entertainment

In the sports and entertainment vertical, Shift4 Payments powers large venues such as stadiums, arenas, and entertainment complexes. Their platform handles high transaction volumes during events, offering fast and secure payment solutions at concession stands, merchandise shops, and other points of sale throughout these venues.

With features like mobile ordering, ticketing, contactless payments, and integrated reporting, Shift4 enhances the fan experience while helping venues streamline operations and increase revenue.

Other verticals

Here is a brief overview of Shift4 Payments in the other verticals.

• Non-profits. Provides donation management solutions, enabling organizations to streamline fundraising efforts and enhance donor engagement through integrated payment processing.

• Sexy tech. Focuses on innovative tech companies and startups, offering customized payment solutions that enhance user experience and facilitate seamless transactions.

• Retail. Serves brick-and-mortar and online retailers with comprehensive payment processing solutions, inventory management, and customer insights to boost sales.

• Gaming. Supports online and mobile gaming platforms with secure payment processing, enabling seamless in-game purchases and enhancing player experiences.

Growth drivers

Shift4 Payments has multiple growth drivers. In their existing verticals, they can increase adoption among businesses or introduce new services to expand customer value. They are also poised to enter new verticals, such as EV charging for instance, through organic growth or strategic acquisitions. Additionally, geographic expansion offers significant potential. Currently operating in North America and Europe, Shift4 is targeting Africa as its next big market, presenting an opportunity for further global growth.

Shift4 Payments' capital allocation aligns with its strategic objectives:

• To enhance customer acquisition, the company eliminates costs for merchants by providing hardware, offering financial incentives, and running promotions, with a typical payback period of under 18 months

• They invest in product development, focusing on new vertical capabilities, improved features, and better integration

• Acquisitions is a significant growth lever. More than $1.8 billion has been spent since 2020

• Excess cash is allocated for share buybacks. Despite approximately $300 million used for this purpose in the past three years, the total number of shares has increased due to acquisitions and the pressure of stock-based compensation

Zoom on acquisitions

Vectron represents Shift4 Payments' latest major acquisition and is a good example of the strength of the company to create synergies with acquisitions.

As a leading European POS provider with over 65,000 restaurants utilizing its solutions, this acquisition will enhance Shift4's penetration in the European market. Transitioning Vectron's existing model to the Shift4 Payments framework will enable the company to monetize payments more effectively, delivering greater value. The expected payback period for this investment is under 18 months.

The revenue synergies from acquisitions are a significant advantage of Shift4 Payments' business model:

• Transitioning existing merchants to the new platform

• Expanding legacy revenue through a payment-centric value proposition

• Cross-selling additional volume

• Attracting new merchants by enhancing market position

• Achieving cost synergies and improving operational efficiency

In the upcoming sections, available to paid subscribers, we will present key metrics, conduct a SWOT analysis, estimate fair value, and calculate the potential TSR for shareholders considering an investment in Shift4 Payments.